Every week, we’ll profile a high yield investment fund that typically offers an annualized distribution of 6-10% or more. With the S&P 500 yielding less than 2%, many investors find it difficult to achieve the portfolio income necessary to meet their needs and goals. This report is designed to help address those concerns.
Thanks to the Fed’s aggressive rate hiking cycle, fixed income & cash have become legitimate income-producing asset classes again. The safest short-term Treasury bills have yields around 5% and junk bonds are up to 8%. It’s a little counterintuitive to think that junk bonds have actually outperformed Treasuries throughout this cycle because the credit quality component usually gets dinged as conditions get tighter. That’s largely been a result of the idea that recession may be further off than originally thought and that’s continued to make high yield bonds look comparatively attractive.
But the yields that investors can achieve on junk bonds goes even higher. Covered call strategies have traditionally been limited to equity portfolios, but now they’re being developed around bond funds as well. The iShares High Yield Corporate Bond BuyWrite Strategy ETF (HYGW) is essentially a carbon copy of the popular iShares iBoxx $ High Yield Corporate Bond ETF (HYG) with an option writing strategy laid over the top of it. It’s quite simple in structure, but the elevated volatility in the bond market right now has really increased the value of options on bond products. That’s pushed the annualized distribution yield of HYGW up to nearly 20%. More importantly, is it sustainable and what are the risks?
Fund Background
HYGW tracks the CBOE HYG BuyWrite Index and is designed to measure the performance of a strategy of holding the underlying fund while writing one-month call options on HYG to generate income. The index utilizes European style call options, which means they can only be exercised at expiration. In short, HYGW writes at-the-money call options with one-month expirations over 100% of the portfolio.
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